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For Ask Matt Readers: Micron Technology, Inc. (MU) – Neutral Rating

Thursday, April 7th, 2011

Micron Technology, Inc. (MU) gets our Neutral rating. Click here for details in our free report on MU.

Micron’s stock has done very well recently (up 28% in the last 3 months) and we think the valuation is full. The company’s quality of earnings and profit growth look good, but the current stock price fully reflects that. We think investors should pay more attention to SanDisk Corporation, which is our Stock Pick of the Week and gets our Very Attractive Rating. Compared to MU, SNDK has been largely overlooked, down 10% in the last 3 months, even though the company has higher returns on invested capital (ROIC) and a much cheaper valuation.

One of the issues weighing down the investment merit of MU is the amount of write-downs management has taken over the past 13 years. Specifically, and as detailed in our report, MU’s management has written down over $3bn in assets, that equals 25% of the company’s current reported net assets. In other words, MU’s management has written down 25 cents of every dollar that investors have trusted them with. As detailed in our report “Hidden Management Failures: Asset Write-Downs“:

  • Given that managers are paid to create value, not destroy it, asset write-downs reflect manageĀ­ment incompetence and failure to allocate capital effectively.
  • Investors must beware companies that report artificially high profits due to the asset-write-down loophole.

Bottom line: we recommend you invest in SNDK, not MU.

Check out New Constructs’ stock-picking accolades. Barrons has consistently ranked our Most Attractive Stocks as #1 or #2 amongst the model portfolios of the top Wall Street firms.

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3 Comments

  1. varadha says:

    Terrific, yet simple analysis. I’ve always been a fan of ROIC as a measure of capital efficiency and believe that no size/growth outperformance can replace the quest for efficiency.

    Sort of like a big gas guzzling v8 that needs ever increasing gallons of fuel to keep its engine running

  2. David says:

    But Angie’s $90 per user acquisition cost is going to go away. That’s what their approach probably is. How would their outlook be if that $90 cost dropped down to a total cost of $3 per user?

  3. David:

    That would be great, but cost per user acquisition is not something that’s very easy for a company to fix. ANGI can slash their marketing budget to the bone, but then they would stop acquiring new members. They would probably lose members in fact, as their membership renewal rate is at ~75% and declining. If they cut marketing expense by ~95% as you seem to be suggesting, ANGI might be able to eke out 1 year of slight profits, but they would start shedding members and losing money very quickly. ANGI’s only hope is to keep its marketing budget high and hope it can reach the scale and brand awareness to be able to sustain its business while scaling back marketing costs enough to turn a profit. The fact that ANGI’s revenue growth is slowing down even as its marketing costs keep increasing makes it very unlikely it will achieve that goal.

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